2022 AFBA Financial Planning Guide

c. Over-limit Fees. Cardholders will not face over-limit fees unless they specifically opt in to allow over-limit transactions. d. More Time to Pay. Banks must send out statements at least 21 days prior to the due date. e. Payment Allocation. Any payment over the minimum payment amount must be applied to balances with the highest interest rate. In the past, payments were applied to balances with the lowest rate thereby increasing the time it took to payoff higher-rate balances. 11–2. CONSUMER LOANS. A consumer loan is considered closed-end credit because the borrower contracts a specific loan for a specific purpose such as purchasing a car, buying a refrigerator, or financing education. The amount of the loan is fixed and repayment is required within a specified period of time. Consumer loans are mainly obtained from commercial banks or credit unions. They may also be obtained from sales financing companies (to finance the purchase of a specific item) and personal finance companies. These loans generally have higher interest charges and may require a cosigner depending on your credit. Most consumer loans are repaid on a monthly installment basis. The monthly payment consists of both interest and principal and the entire loan is repaid within a specified period of time. Some consumer loans may require only a single payment at the end of the loan period. Individuals may do this when they need short-term financing for a specific project like building a house. They finance the initial construction with a short-term loan and then pay off that loan with the proceeds of a long-term mortgage after the house is built. Consumer loans may be secured or unsecured. Secured, or collateralized loans, provide the lender with the ability to seize a particular asset in the event the borrower fails to pay. Automobile loans are generally secured. In this case the lender holds the vehicle title until the loan is fully paid. Unsecured loans are made based upon the credit reputation of the borrower. Since the risk is greater for the lender, unsecured loans may carry a higher interest rate. The loan contract specifies all of the conditions associated with the lending agreement. The contract has a lot of fine print which you must understand. In particular you need to look for acceleration and deficiency payment clauses. Acceleration clauses require that the entire loan becomes fully payable in the event that a single loan payment is missed. Deficiency payment clauses allow the lender to take recourse against you in the event that the sale of a

days in the billing cycle to get an average daily balance. The monthly interest charge is then computed against that balance. b. Previous Balance Method. This method computes the current interest charge based upon the previous month’s balance regardless of payments made during the month. This is usually the most expensive method. c. Adjusted Balance Method. This method computes the current interest charge based upon the previous month’s balance after subtracting any payments that were made. Choosing a Card. Fees, interest rates, grace periods, payment terms, and benefits such as rebates and points are the primary attributes of most cards. Evaluating these alternatives can be confusing. The choice between various cards should be determined by the intention of the credit card user. Approximately one-third of all cardholders pay off the balance each month and use the card only for the convenience it provides in making purchases. These cardholders are not concerned about the interest rate. They are looking for a card that has a low or no annual fee, extended grace periods, and other benefits such as airline miles or rebates. Cardholders who carry a balance should be less concerned about an annual fee and benefits and instead focus on the interest rate and the method used to calculate the interest charge. These individuals should look for a card with the lowest APR that uses the Adjusted Balance Method for calculating monthly interest. Secured cards are cards that have been collateralized through an advance payment made by the cardholder. If the cardholder does not pay the credit card bill, the issuer will use the deposit money to pay the bill. Secured cards are often used by individuals who have difficulty getting a card because of their poor credit history. However, because activity on a secured card is reported to the credit bureaus, it is a good option to build or to work towards restoring one’s credit. Consumer Protection . The Credit Card Accountability, Responsibility, and Disclosure, or “CARD Act” was designed to protect credit card users from certain practices banks impose on credit cardholders. Some of the highlights include: a. Retroactive Rate Increases. Banks are not able to increase the interest rate on existing balances unless the account is 60 days delinquent or it is the end of a promotional rate period. b. Advance Notice of Rate Increases. Banks must provide 45 days notice before implementing a rate hike.

CHAPTER 11: PERSONAL CREDIT

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